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Tax Treatment Of Contributions

Starting in 2002, participants in the Inter-Local Pension Fund can not only deduct their  contributions to the Fund in calculating their adjusted gross income, but they can also take a portion of their contributions as a credit against their federal income tax.

Please keep in mind that the Inter-Local Pension Fund does not provide tax advice. You should discuss these issues with your accountant or tax advisor. However, we want to give you this information for use with your accountant or tax advisor.

The Deductibility of Your Contributions Up to $7,000

The Inter-Local Pension Fund is a trust described in Section 501 (c)( 18) of the Internal Revenue Code. Section 219(b)(3) and (e) of the Code allows you to deduct your contributions to the Fund up to a maximum of $7,000 per year or 25% of your compensation, whichever is less.

Your deductions to an individual retirement arrangement (“IRA”) may count against this $7,000 maximum. In addition, if you participate in other plans, such as a 401(k) plan, you may be subject to a higher combined maximum limit on deductibility, depending upon your age. Please consult a tax advisor or accountant with respect to the limits on deductibility which apply to you.

To claim this deduction on your 2004 federal tax return, enter the amount of your 2004 contributions and the words “501(c)(18)(D)” on the dotted line next to Line 35 on Form 1040.

A Tax Credit for Your Contributions

In addition, Congress recently amended the Code to allow a “Qualified Retirement Savings Contributions Credit” against your federal income tax for contributions to certain retirement savings plans, including 501(c)(18) plans such as the Inter-Local Pension Fund, as well as 40 1(k) plans and IRA’s. Beginning in 2002, if you make contributions to the Inter-Local Pension Fund or to an IRA, you may be eligible for this tax credit, called the “saver’s credit.” This credit could reduce the federal income tax you pay dollar-for-dollar. The amount of the credit you can get is based on the contributions you make and your credit rate. The credit rate can be as low as 10% or as high as 50%, depending on your adjusted gross income - the lower your income, the higher the credit rate. The credit rate also depends on your filing status. See the tables at the end of this web page to determine your credit rate. If your income exceeds a certain amount, no credit is available.

The maximum annual contribution taken into account for the credit for an individual is $2,000. If you are married filing jointly, the maximum contribution taken into account for the credit is $2,000 each for you and your spouse. The fact that your contribution is deductible does not reduce the amount of the available credit.

This credit is available to you if you:

•  are 18 or older,

•  are not a full-time student,

•  are not claimed as a dependent on someone else’s return, and

•  have adjusted gross income (shown on your tax return for the year of the credit) that does not exceed:

$50,000 if you are married filing jointly,

$37,500 if you are a head of household with a qualifying person, or

$25,000 if you are single or married filing separately.

Example: Susan and John are married and file their federal income tax return jointly. For 2003, their adjusted gross income would have been $34,000 if they had not made any retirement contributions. During 2003, Susan elected to have $2,000 contributed to her employer’s 401(k) plan. John made deductible contributions of $2,000 to the Inter-Local Pension Fund for 2003. As a result of these contributions, their 2003 adjusted gross income is $30,000. If their federal income tax would have been $3,000 (after applying any other credits to which they are entitled) without having made any retirement contributions, then their federal income tax as a result of making the $4,000 retirement contributions will be only $400 after application of the saver’s credit and other tax benefits for the retirement contributions. Thus, by saving $4,000 for their retirement, Susan and John have also reduced their taxes by $2,600.

The annual contribution eligible for the credit may have to be reduced by any taxable distributions from a retirement plan or IRA that you or your spouse receive during the year you claim the credit, during the 2 preceding years, or during the period after the end of the year for which you claim the credit and before the due date for filing your return for that year. A distribution from a Roth IRA that is not rolled over is taken into account for this reduction, even if the distribution is not taxable. After these reductions, the maximum annual contribution eligible for the credit per person is $2,000.

Example: Mark’s adjusted gross income for 2003 is low enough for him to be eligible for the credit that year and he defers $3,000 of his pay to his employer’s 401(k) plan during 2003. During 2001, Mark took a $400 hardship withdrawal from his employer’s plan and during 2003 he takes an $800 IRA withdrawal. Mark’s 2003 saver’s credit will be based on contributions of $1,800 ($3,000 - $400 - $800).

The amount of your saver’s credit will not change the amount of your refundable tax credits. A refundable tax credit, such as the earned income credit or the refundable amount of your child tax credit, is an amount that you would receive as a refund even if you did not otherwise owe any taxes.

The amount of your saver’s credit in any year cannot exceed the amount of tax that you would otherwise pay (not counting any refundable credits or the adoption credit) in any year. If your tax liability is reduced to zero because of other nonrefundable credits, such as the Hope Scholarship Credit, then you will not be entitled to the saver’s credit.

CREDIT RATES

 The “Retirement Savings Contributions Credit” is entered on Line 50 of the 2004 federal Form 1040. IRS Form 8880 (“Credit for Qualified Retirement Savings Contributions”) should be attached.